President Barack Obama pledged to take "precise" military action if needed to check marauding Sunni radicals in Iraq and offered up to 300 US advisors to train Iraqi forces facing a crisis splintering the country along sectarian lines.

But Obama, who based an entire political career on ending US involvement in Iraq, insisted the United States was not slipping back into the morass -- and warned Iraqi Prime Minister Nuri al-Maliki and Iran that promoting sectarianism would spell disaster.

Obama signed off on White House action after meeting his top national security advisors to discuss how to respond to swift gains by Islamic State of Iraq and the Levant (ISIL) insurgents who have seized several key cities and threaten to advance on Baghdad.

The fighters have grabbed northern Iraq's biggest city, Mosul, displaced hundreds of thousands of people, left an unknown number dead and alarmed Western nations who fear the establishment of a vast new "terror" haven.

Obama was adamant, however, that "American forces will not be returning to combat in Iraq."

"But we will help Iraqis as they take the fight to terrorists who threaten the Iraqi people, the region and American interests as well," he said.

Obama said he had already bolstered surveillance and intelligence capabilities in the country as he weighs possible military operations in the US national interest.

"Going forward, we will be prepared to take targeted and precise military action if and when we determine that the situation on the ground requires it," said Obama.

Washington has already positioned an aircraft carrier in the Gulf and is also considering using drone strikes against ISIL militants.

Senior US officials privately said that special forces being sent to advise Iraqi forces could also be used to call in air strikes if necessary.

A senior US official said the US advisors would operate in small teams of about a dozen special operators embedded at "upper headquarters" level in the Iraqi forces, and perhaps later at brigade level.

The deployments would happen "very soon," the official said.

Military officials also confirmed that US forces were already flying F-18 and unmanned surveillance flights over Iraq.

It remains unclear, however, whether ISIL forces deployed in civilian areas will provide suitable targets for US aircraft or drones, and the risk of casualties could give Washington pause.

The president said he was prepared to send up to 300 military advisors to Iraq -- in addition to 175 troops currently protecting the US embassy and 100 more on standby -- to assess how to train, advise and support Iraqi forces.

The US government, which spent billions of dollars building up the Iraqi army after disbanding the Sunni-led force of ousted dictator Saddam Hussein, was dismayed by the way some units laid down their arms and fled the advance of ISIL fighters.

But Iraqi forces now appear to be performing better, and regained full control of the country's largest oil refinery in Baiji.

The Pentagon has noted a stiffening of resistance among security forces around Baghdad and a flood of volunteers to Shiite militias may also be helping.

Despite opening the way to a more overt role in Iraq, Obama warned that there was no military solution to the crisis.

He said that Maliki's actions could dictate the fate of the country, amid a growing feeling in Washington that the Iraqi leader would do best by moving on.

"The test is before him and other Iraqi leaders as we speak," Obama said.

"Regardless of what's happened in the past, right now is a moment where the fate of Iraq hangs in the balance," he said, calling for an end to mistrust, deep sectarian divides and political opportunism.

Obama also warned Iran, which has cultivated Maliki as a Shiite ally, that it must also play a positive role -- and that if it did not, could threaten its own security.

"We've indicated to them that it is important for them to avoid steps that might encourage the kind of sectarian splits that might lead to civil war," Obama said.

"(An) Iraq in chaos on their borders is probably not in their interests.

But old habits die hard."

Washington has said it is open to working with its foe to stabilize Iraq, but has ruled out any kind of military cooperation.

Obama also announced a new diplomatic initiative, sending Secretary of State John Kerry to Europe and the Middle East this weekend to consult on next steps with US allies and Iraq's neighbors.

Congressional sources said Kerry would travel to Iraq "soon."

Oil prices soared to a new nine-month high because of the violence in Iraq, and the attack on the refinery.

Britain banned ISIL, adding it to a list of proscribed organizations along with four other groups linked to the Syrian conflict, as fears grow the radicals could pose a direct threat to European security.

India said it knows the location of its 40 workers abducted from Mosul as several of their families said they spoke with the captured men who were scared but "safe." (AFP)